A capital gain is a rise in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. Capital gains income is taxable, but may be taxed at a different rate than other forms of income (earned, retirement, dividend, etc.).
In Oklahoma, certain capital gains income is fully deductible from state income tax. The deduction allows taxpayers to exempt from their taxable income any gains from the sale of property located in Oklahoma or stock of a company headquartered in Oklahoma. To qualify for this exemption, the seller must have owned the property for at least five years or the stock for at least two years before the sale.
A 2021 report prepared for Oklahoma’s Incentive Evaluation Commission estimated that the capital gains tax deduction led to an estimated $716.3 million in forgone tax revenues from 2014 to 2018, an average of $143.3 million per year, while only creating $403.3 million in positive economic benefits. Fewer than 20,000 taxpayers benefited from the deduction each year, with 66 percent of the credit going to taxpayers with income over $1 million. The report’s authors recommended repealing the capital gains deduction, or, alternately, reconfiguring it to establish clear economic development goals; require that qualified gains be reinvested in Oklahoma; cap the deduction, and target the deduction, such as for farming and ranching operations. The Commission rejected the recommendation and instead called for an interagency task force to study the incentive. The first study of the capital gains deduction, in 2017, recommended its outright repeal, but the recommendation was rejected by the Commission. Legislation to repeal the capital gains deduction, SB 1086, passed the Senate in 2018 but was not taken up in the House.
The capital gains deduction cost the state $108.0 million in FY 2022 and was claimed by 16,533 taxpayers, according to the Oklahoma Tax Commission.
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- State of Oklahoma Incentive Evaluation Commission: Tax Incentive Evaluation Report (2021)
- State of Oklahoma Incentive Evaluation Commission Capital Gains Deduction (2017)
- Capital gains deduction is an expensive loophole benefiting a small number of Oklahomans (Cynthia Rogers, Ph.D)
- State of Oklahoma Tax Form 561 Oklahoma Capital Gain for Residents Filing Form 511